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PruFund Planet: know your client

Q&A: Highlighting some sustainable investing questions that are likely to emerge during your client discussions

Sustainable investing is enjoying considerable growth, both in terms of asset inflows into sustainable funds and the number of people choosing to invest this way.

For advisers, sustainable investing has become an important topic of discussion with clients to ensure that their investments are suitable for their attitudes to sustainability as well as to meet their overall investment and lifestyle objectives.

When discussing sustainable investing with your clients, what information do clients need to know? What is the role of sustainable investing in helping them to achieve their financial goals whilst enabling them to express their values? And where does it fit into the overall, long-term financial planning strategies that you create with them?

Here are a series of questions which have been identified as themes which clients may ask you as they consider sustainable investing, whether it is right for them and what insight and guidance they might expect from you, as their adviser.

  1. What are sustainable investments? In what ways are they different from other types of funds I’m more familiar with?

Also called ESG (environment, social and governance) or responsible investments, sustainable investments are portfolios of funds where the underlying assets, for example the businesses that the fund is investing in, have been screened and evaluated to make sure they meet certain environmental, social and governance criteria. These will vary from fund to fund, and there is a spectrum. This ranges from excluding certain categories such as weapons and tobacco to choosing investments that do less harm, such as green energy rather than fossil fuels to those that actively do good, for example in health and education. But in general, ESG investments are designed to meet certain standards, in terms of the activities, standards and behaviours of the businesses that the funds invest in.

As the market for sustainable investing is growing, so too is the choice of funds available and advisers can help clients to choose where to invest based on their personal interests and values, their appetite for risk and the investment philosophy and strategy of the investment provider.

However, sustainable investments are still investments. Funds will be managed and run in the same way, using the same systems and processes as other types of investments. It is simply the criteria for choosing the underlying assets that is different.

  1. What is behind the growth in sustainable investing in recent years?

There is no single reason why sustainable investing has seen such significant growth. Instead, it is due to a combination of factors, some of which are long-term trends, others are more a result of recent changes, such as the Covid Pandemic, which have had an impact on people’s views and values.

a) Greater public awareness of ESG issues

With topics such as climate change and responsible business practices now much higher on the news agenda and with much greater media coverage and social activism, it’s no surprise that people are starting to connect these issues to where they invest their money. Of course, the movement for ethical investing has been around for decades, but more recently it has become mainstream alongside the issues it champions. With the rise in workplace pensions and the increasing popularity of products such as Stocks & Shares ISAs and drawdown pension plans, ESG investments are in the right place at the right time.

b) Investing in the future

Some ESG funds don’t just exclude the companies who are creating problems for society and the planet, but they will include exposure to those which are providing the solutions. Industries such as green energy and clean technology are not only active in solving our climate crisis, but as a result, are well positioned to grow and thrive in future – thereby providing good investment opportunities. What’s more, companies which behave responsibly, for example by reducing their carbon footprint, adopting diverse and inclusive working practices and treating their customers and staff fairly face fewer risks and potential penalties than those which don’t. They too are likely to be stronger, more sustainable businesses over the long-term and with the potential to generate better returns over time than those which chase short-term profits at the expense of people and the planet.

c) Investors have a say

In some cases investing in sustainable funds means your fund provider is a shareholder and therefore has a voice at the company meetings of those companies it invests in on your behalf. This means they can raise concerns with regard to issues such as the company’s carbon footprint, its business activities, its community engagement and directors’ remuneration and can have an influence in their behaviour. Moreover, some fund providers go one step further and work in a more active way with the businesses they invest in, advising them on their ESG strategies and providing hands-on support and guidance to help them succeed in the right way.

  1. Can they be used to achieve my investment goals?

Yes, they can. The success of ESG investing in recent years has created choice for investors and new funds are coming to market on a regular basis. This means that in addition to ESG criteria, investors can choose funds that:

  • cater for a range of risk appetites
  • can be used for either accumulation or decumulation (or both)
  • are UK, country or globally focused
  • are active, passive or an ETF
  • offer a choice of ESG investment styles, from risk-mitigation to positive impact.

If we think about investment goals from a personal, as well as financial perspective, sustainable investing is taking on a more significant role as part of intergenerational financial planning strategies – considering how to best help the next generations, whilst at the same time, helping to minimise any Inheritance Tax liabilities. With the advent of the Pension Freedoms and the corresponding rise in the adoption of drawdown plans, people are able to leave their pension fund as a legacy to their heirs.

Ensuring that a pension fund is invested positively, in ways that help to impact and improve the world that the next generation inherits, is something that people are starting to consider. Likewise, when investing in Junior ISAs and Junior SIPPS, on behalf of children and grandchildren, especially given their long-term investment horizons, the sustainability of those investments and the future they are helping to create, is becoming important criteria for some.

  • What type of sustainable investments are there?

While every sustainable investment fund is unique, there is a wide diversity in the terminology used across the spectrum, given that providers have developed their funds independently and each with their own set of specific objectives. However, there are some broad categories that the majority of sustainable funds will fit into (and some cases may fall into more than one category). These are:

Screened funds that exclude (or will only include a limited percentage of) investment in companies engaged in ‘negative’ activities such as arms, tobacco, or fossil fuels. By the same token, there are others that screen from the opposite perspective, only investing in companies that deliver a positive impact on society or the planet.

Climate. Funds that focus exclusively on investing in companies engaged in reducing climate change.

ESG funds. These funds invest in companies (and/or bonds) for which environmental, social and governance factors are part of their investment process and invest only in companies that meet strict criteria.

Impact. Funds that typically invest in companies that set out to have a clear positive impact on climate solutions, clean air, water and land usage.

  1. How do I find out which type of sustainable funds are right for me?

For advisers, asking clients about their ESG preferences is not required by law, it is increasingly seen as best practice across the advice profession, especially in the light of growing media coverage and consumer awareness.

A suitability questionnaire will help advisers and paraplanner to understand clients:

  • investment goals
  • time horizons
  • personal attitude to risk
  • attitude towards sustainability

A recommendation for which type of funds match these personal requirements will then be made and sustainable investing may form all or part of this recommendation.

  1. Where can I get access to sustainable funds?

It is important to distinguish how to invest in a sustainable fund, and how to find a provider. Firstly, sustainable funds are available for all the investment ‘vehicles’ that you would use wider funds for, such as Stocks & shares ISAs to use up tax allowances, lump sum or regular investments, pensions and bonds. They can be used for general investing, to save for retirement or to generate an income in retirement, for example as part of a drawdown plan. Likewise, they can be used as part of an IHT planning strategy, in the form of Junior ISAs and Junior SIPPs and bonds. However, their availability (as is the same for all funds) will vary dependent on the product provider.

The mix of financial products that an adviser recommends will of course depend on each individual client’s personal circumstances and financial goals, however, the vast majority of these products are available in a sustainable form.

For more information on PruFund Planet, please click here

The value of any investment can go down as well as up so your clients might get back less than they paid in. Past performance is not a guide to future performance

 

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